Is it time to invest in cheap FTSE 250 stocks?

Historically, the FTSE 250 has proven a rich hunting ground. Our writer explores whether now could be the time to buy potentially undervalued shares.

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While the FTSE 100 represents the well-established giants of the UK, the FTSE 250 represents a broader spectrum of businesses that make up the backbone of the British economy.

Consequently, these companies are generally more domestically focused than their larger, blue-chip counterparts, and often have a substantial presence in the UK market.

Given the understandable focus on the FTSE 100, I think individual investors can be prone to overlooking the many companies that make up the FTSE 250 index.

With that in mind, is now a good time to invest in potentially undervalued FTSE 250 companies?

Poor index performance

The FTSE 250 is regarded by some as the market’s sweet spot, housing swiftly expanding companies that have navigated the riskiest phases of their growth. But the index as a whole has somewhat struggled in recent years.

To illustrate, in the last 12 months, its value has barely increased, while the FTSE 100 has risen by approximately 6% over the same period.

Looking at year-to-date growth paints a bleaker picture. Since the beginning of January 2023, the FTSE 250 has lost around 8% of its value. Over the same period, the FTSE 100 has only lost 1%.

But I’m less concerned about the performance of the index as a whole and more interested in individual companies with strong fundamentals and growth potential.

Undervalued FTSE 250 firms

For example, let’s take Bank of Georgia Group. The industry-leading bank serves over 2.6m customers through one of the largest services distribution network in Georgia.

While Georgia is a growing economy, its location unfortunately means there will likely continue to be an increased risk of regional tensions and economic instability that could impact business environment.

Nonetheless, by harnessing strong customer relationships, continuous digital innovation and cutting-edge banking solutions, the group aims to deliver above 20% return on average equity (ROAE) and around 10% growth in the loan book over the medium term. Granted that’s ambitious, but I like it and I’m confident.

With a price-to-earnings ratio of just 3.8 and a dividend yield of 6.3%, the shares look like a steal in my eyes.

And then there’s Mitchells & Butlers. The pub and restaurant operator has enjoyed a robust financial performance in 2023 on the back of increased volume in both food and drink sales.

This indicates resilient and growing demand for the pub chain’s offering. So much so that it now expects full-year earnings to be the top end of expectations.

As I write, the shares trade at around the 202p mark and earlier in the year, analysts at Jefferies upgraded the stock to a ‘buy’ with a 270p price target.

That said, the group will still be mindful of the challenging macroeconomic environment and pressures on the consumer, which could act as a drag on any further increase in sales.

It’s time to invest

From my perspective, the FTSE 250 is home to a wide range of established companies with the potential to deliver further strong growth. As such, I see a handful of great buying opportunities across the index.

If I had some cash to spare, I’d hoover up some shares in a heartbeat.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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